TCO: The Next Generation

11/30/1998

Feared by CIOs, evangelized by CFOs, and ignored by most everyone else, Total Cost of Ownership (TCO) may be in need of a public relations makeover. Still, when used properly, TCO analysis can play an important strategic role in business operations.

Opposing Pressure Points

Under many business models, IT support organizations are cost centers measured on efficiency, rather than effectiveness. This typically results in budget cuts at a time when business units are pushing for supersonic service levels -- all while operating in a distributed environment where autonomy often rules. These opposing forces drain an enterprise's operating performance. In the midst of this organizational swirl, TCO often is introduced as a weapon, rather than the catalyst for change that it can be.

TCO should reflect the value IT decisions have on a company’s overall strategic mission. It should demonstrate alignment with business initiatives by establishing linkage points between TCO metrics and baseline business objectives. And TCO as a strategic tool has value beyond the usual standards of measurement -- ROI, ROA, profit and revenue. Organizations, regardless of size or nature, can use client satisfaction, service levels and business risk as performance measures. In the end, optimizing IT requires looking beyond bottom-line costs and taking into account people, process, finance and technology.

Under the Microscope

A good TCO analysis should first capture current IT support costs in your distributed environment. It should assess the effectiveness of key processes, and measure them against industry benchmarks and identify alternatives that can make a difference in operations, add value and accelerate go-to-market initiatives.

Shrinking the IT budget simply shifts the costs down the line and, in large companies, we often find that old-style TCO methodologies pushed 50 percent to 70 percent of IT dollars off the books and straight into business units. This is most often found in vulnerable help desk and training areas.

In one company, total spending after budget cuts had actually increased 160 percent as each business line set up its own programs, creating duplication and conflict in the company's overall IT operations. Cuts in end-user desktop training budgets resulted in an increase in user-induced outages, diminished technology utilization, poor productivity, peer support that disrupted normal operations and covert staff hiring. Although the cuts were applauded, overall business benefit to the enterprise was far more negative.

Optimizing Effectiveness

The right level of cost reductions, however, can provide optimal effectiveness. Tip the balance, however, and you will have “diminishing marginal utility.” So when examining costs, it’s important to look across the enterprise at the four major components of cost of ownership:

-Administrative

-Operational

-Capital

-Technical

Using an enterprise asset management architecture built on policies, processes, procedures and systems can have a greater impact on TCO than you might imagine.

Moving to a Managed Environment

Distributed environments in which business lines control the desktops can be the enemy of effectiveness. Without a “single point of control” to coordinate capital acquisitions and manage end user requests, “pull” transactions directed by departments often lead to redundancies, lack of standards and inconsistent service levels. By transforming the environment into “push” transactions, the process becomes more strategic, centralized and manageable. Technology Optimization Profiles can be used to align end-user needs with the most appropriate assets, allowing for cascading of equipment and enhanced overall savings.

Another procurement practice TCO analysis can evaluate is the buy vs. lease approach. Standards are the “center of gravity” in a managed environment. Corporations can save between 30 percent and 60 percent of the overall TCO.

Proving the Value

With continuing pressure on CIOs to contain costs, a solid TCO analysis can provide the best methodology for justification of IT decisions. But taking it to the next generation can demonstrate the true value the IT functions provide to the organization.

Gerry Nelson is a principal with IBM Global Services' Total Cost of Computing Consulting Practice. geraldn@us.ibm.com